By Melanie Doncas
As a small business owner, there’s no doubt you’re familiar with business loans, but have you ever heard of an unsecured loan before? Unsecured loans differ from your standard business loan and today we’re going to discover why, as well as how such a loan can help your business to thrive.
What Is an Unsecured Business Loan?
An unsecured loan differs from other types of common loans and contains one major difference: it doesn’t require collateral for the loan to be ‘secured’. Collateral is something that you or your business owns that you pledge as security for repayment (such as property, cars, equipment, etc.)
Instead, with an unsecured loan, the loan is issued and supported only by the borrower’s creditworthiness. An applicant may have to provide a personal guarantee from the directors of the business. As a result, the lender cannot seek repayment by going after your assets.
Types of Unsecured Business Loans
There are many different types of unsecured business loans, offering business owners a flexible and convenient way to fund their small business. Let’s delve into each one below.
Business Line of Credit
A business line of credit is similar to personal credit, in the fact that it allows you to borrow a certain amount of capital annually. This type of unsecured loan is quite unique because it only requires you to make repayments on the credit you’ve actually used. You won’t have a regular monthly payment schedule (as you would with a short-term or long-term loan), but there usually are minimum monthly payments required.
Business Credit Card
Business credit cards work almost like a personal credit card, with the biggest difference being that they’re for business-related expenses only. Credit cards are based on your credit score, so they also don’t require collateral like secured loans. There are many different types of business credit cards, including rewards cards, interest-free days cards, low rate cards and corporate cards. Business owners are advised to choose one that suits their wants and needs.
Technically, this type of business loan requires collateral, but not in the form of property like most other loans. Instead, equipment financing uses existing equipment or the equipment you want to purchase to ‘secure’ the loan.
Invoice financing is quite similar to equipment financing, except instead of using equipment to secure the loan, you use your outstanding invoices as collateral for the loan. Invoice financing lets you borrow money from a lender based on the amount of money owing to your business (i.e from unpaid invoices).
Merchant Cash Advance
Another unsecured business loan includes a merchant cash advance, where a lender purchases a business’s future cash flow and uses future transactions to repay the borrowed funds. The lender also charges a fee, plus they take a percentage of each future sale (usually 20%) until the loan has been fully repaid. This type of loan is particularly beneficial for retailers receiving a high proportion of payments via credit card or EFTPOS.
How Can an Unsecured Loan Help Your Business
Now that you’re familiar with the various types of unsecured loans, as well as what each one entails, it’s time to determine how an unsecured loan can help your small business. Below are five of the most common ways a business owner can use their acquired funds to boost their venture.
1. Increase Working Capital
Working capital is the money your business has available to manage day-to-day expenses, as well as anything you might not have prepared for (like seasonal fluctuations in sales). This money can act as a safety net and is often the difference between businesses that fly or fail.
2. Hire or Pay Employees
As your business grows, you may need to hire additional staff to help things run smoothly. Additionally, you may simply need extra funds to ensure your current staff are paid on time. Either way, a business loan is a great option for providing you with enough finance to do either of these things.
3. Buy Equipment or Machinery
New equipment and machinery can be expensive, but they’re often vital to help your business grow or to make processes a lot quicker and more efficient. This is where a business loan can come in handy.
4. Do Renovations
Perhaps your business premises need updating, but you don’t want to dip into your working capital to make it to happen. A business loan can be beneficial here, as it can give you the funds required to fit-out new furniture or update the premises with renovations.
5. Maximize Advertising and Marketing Costs
Both of these things are necessary to boost your business and increase your sales, but they do come at a cost. Rather than dipping into your day-to-day funds, business owners can gain additional funds through an unsecured business loan.
Now that you know what an unsecured loan is, along with the various ways it can help your business, you’re sure to make a more informed decision regarding business finance. Just keep in mind that you don’t always have to provide your home as collateral to obtain business funding. Unsecured business loans can offer finance that’s flexible and convenient.